Joint ventures can take many different forms and can be defined in various ways. A common example of a joint venture involves two business entities or individuals with aligned strategic interests entering a legal arrangement where each party will contribute resources to accomplish a common goal. This entry explores several legal issues to consider when planning a joint venture.
The parties to a joint venture will need to document how they will share profits and losses experienced by the venture. Contributions of cash, property and/or services should also be clearly defined, as well as distributions during or at the termination of the venture. However, because a joint venture will often involve a mutual undertaking between parties with some overlap in their strategic business operations, capabilities and goals, the parties should clearly spell out the legal boundaries of the overall relationship.
Noncompetition Agreement
One issue is whether the parties will agree not to compete with one another or the venture entity during or for some period of time after the termination of the venture. Noncompetition provisions could apply based on customer or geographic boundaries. For example, if one party to a joint venture has a pre-existing customer relationship prior to entering the joint venture, will the other party be precluded from working with that customer after termination of the venture? If two parties that have preexisting operations in different geographic territories form a joint venture, will each party be prohibited from operating in the other party's territory after termination of the joint venture?
Confidentiality Provision
The joint venture agreement should also define the parties' obligations with respect to confidential information that is shared or developed during the term of the joint venture arrangement. Information sharing is often a sensitive matter within a joint venture. Each participant must feel comfortable that information that is shared within the scope of the joint venture and which is vital to helping the venture achieve its goals will be protected during and after the term of the venture, or the venture will not be able to achieve its goals.
Company Opportunities
Joint venture participants should agree on a process for determining whether a participant is obligated to refer a business opportunity to the venture or whether the individual participant may consider the opportunity on a stand-alone basis. The most important element in agreeing upon company opportunity provisions is often in defining what types of opportunities fall within the scope of the joint venture's business activities. A related issue is how the joint venture will decide whether to pursue a business opportunity that is identified by one of the venture parties. If one of the joint venture's members is in favor of pursuing an opportunity and the other party is not in favor, will the joint venture pursue the opportunity in some fashion? Will the proposing party have the right to pursue the opportunity individually if the joint venture does not elect to pursue the opportunity?
Unwind/Liquidation Clauses
Another significant issue is whether one of the parties to the joint venture may elect to unwind and terminate the venture or whether both parties must mutually agree on a termination. Related questions involve whether one party would receive the opportunity to buy-out the other party's interest in the venture under agreed upon circumstances, and if so, for what price? What would happen to joint venture projects that were in progress at the time of the termination?
Joint ventures can be very rewarding for both parties to the venture, but the parties should agree to clear terms for the boundaries of the joint venture and the rights and responsibilities of the parties in the event of an unwind or termination of the arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
